UPDATE: CMBS Investors Get Rare Payoff On '07 Loan, Deutsche Bank Says

In some cases, it's paying to wait out the slump in commercial real estate.

A troubled-loan specialist firm recently sold The Crescent, a Beverly Hills, Calif., retail and apartment complex loan to a group of buyers including BlackRock Realty for about $85 million--about $8 million less than the property value at the height of the boom in 2007 but $12 million more than the loan's unpaid balance.

Harris Trifon, a commercial mortgage bond strategist at Deutsche Bank, characterized the sale as "astounding," considering that the average loss on 2006 and 2007 vintage loans is 50%--well above even the average 40% loss on all commercial property mortgages emerging from the real estate bubble.

By actually turning a profit on the loan, which it has been trying to resolve for three years, troubled-loan specialist firm CW Capital Asset Management has demonstrated that in some cases, patience pays. Many have said that quickly resolving delinquent loans--and accepting large losses--is the best way to restore health to the U.S. commercial real estate market.

The loan that CW Capital Asset Management sold is the largest principal repayment so far among 200 loans in a $7.5 billion commercial mortgage-backed security called GSMS 2007-GG10. CW Capital is owned by Fortress Investment Group (FIG). A Fortress spokeswoman didn't make a CW spokesperson available.

Expectations of losses on the deal--which market participants describe as one of the riskier CMBS issued at the height of the property boom in 2007--"remain high," at more than 17%, with more than half of the pool either considered "loans of concern" or already sitting with delinquent loan workout firms, according to a Fitch Ratings review of the bond in October.

But proceeds from the Crescent loan were high enough to cover fees and provide a reserve to cover some losses from other loans in the bond, Trifon said in a note to clients.

The loan's workout "is so much different than what we are accustomed to seeing, especially from the GG10 deal," that it warranted study, Trifon added.

Prices of commercial property--which includes offices, stores, warehouses and apartment buildings--have recently rebounded slightly after declining more than 40% since 2007, according to a Moody's/REAL property index. Prices had fallen as the recession cut income needed to pay debt service or to support earlier appraisals that assumed rising cash flow.

BlackRock's bid with Korman Commercial Properties followed a series of new appraisals showing the property's value has rebounded since the depths of the financial crisis. At its nadir, the property had lost nearly half of its $93 million 2007 value, the appraisal said, according to Trifon.

By late 2010, when CW Capital completed a foreclosure, the appraised value had risen by $10 million, he said. In April of last year, another appraisal estimated the property's worth at $71.6 million.

"While we believe this is a unique case of the asset regaining its lost value over time after the market dislocation, it supports one of our beliefs that some of the appraisals done in 2009 and 2010 [are] no longer reflective of market value," he said.

The market isn't out of the woods yet, however. Many parts of it can't even see the edge of the woods. Fitch Ratings said Friday that loans needing special attention are on the rise and are likely to continue increasing. The number of loans moved to special servicing rose to 340 last quarter, the most of any period in 2011, the ratings firm said in a report.

-By Al Yoon, Dow Jones Newswires; 212-416-3216; albert.yoon@dowjones.com

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